Q&A: Unison Capital's Tatsuo Kawasaki

Q: Investor sentiment on Japan appears to be improving. Why is this?

A: Sentiment is improving and deals are happening for a number of different reasons. There are some clear themes: large corporates spinning off assets to monetize them and focus on their core businesses; and founder-CEOs either exiting or staying on but tapping private equity firms to work with them due to a lack of next generation management talent. The underlying economic factors compelling a variety of business owners to sell have always been there, but we are seeing more deals coming through.

Q: Which of these two strands has been more prevalent in your recent deal flow?

A: The number of spin-outs is definitely increasing – in the last 24 months we’ve had four transactions along those lines. A number of the recent large deals in the market have involved electronics and automotive companies, but the ones we did had nothing to do with that. They were in areas like pharmaceuticals, media, and building materials. The kinds of sellers and the scope of sectors is changing. The spin-outs in the early 2000s were largely driven by balance sheet restructuring. The deals we are seeing now are more about long-term planning, they are forward-looking transactions.

Q: Most recently, Unison acquired a portfolio of drugs from Astellas Pharma and invested in a restaurant chain. To what extent are these deals typical of what you are looking for?

A: These are clear sector themes we have been going after. The pharma deal originated from an investment in our previous fund and a follow-on transaction involving the same company. In the process of executing these investments we assembled a good network of management talent. We used that to pursue the latest transaction, which is a spin-off of an asset from a big pharma company. Similarly, with the izakaya deal, we have previously invested in a variety of retail restaurant businesses so we are familiar with the issues. We know how to help out in terms of retaining workers, encouraging workers to be more productive and customer-friendly, branding operations, and improving product offerings.

Q: Several Japan mid-market funds have announced final closes since the start of 2017. Do you find that competition is increasing in this space?

A: Competition has always been there. A good number of funds have been formed to focus on Japan opportunities and it is healthy to see active participants in the market. If you look at the number of transactions and extrapolate from that what could be possible vis-à-vis the number of funds that have been formed, you wonder if there is an imbalance. But in a nascent private equity market like Japan you are more likely to find there is not enough capital for the number of opportunities that transpire. I think at this juncture, the more the merrier.

Q: To what extent has Unison’s approach become more differentiated over time?

A: Fundamentally, what we have been doing has not that changed much over the years. Fund I was a bit different, but Funds II, III and IV are all very similar. We have been highly focused. Coming into Fund IV [which closed at JPY70 billion ($633 million) in mid-2015] we really concentrated on a few themes – consumer retail services, niche manufacturing, healthcare, and high-growth businesses – so it is easier for people to visualize what we do. But it was more about the way we label ourselves; the underlying drivers of returns are more or less the same. 

Q: What is the exit market like in Japan right now?

A: It’s a great time to sell – valuations are high and corporations are cash rich, generally speaking. If you have a business of digestible size – around $500 million in enterprise value – with a strong balance sheet and a very explainable earnings stream into the future, it’s relatively easy to sell. For companies with enterprise value above $1 billion it is harder, but in the mid-cap segment there are plenty of buyers, and that’s one of the reasons why we want to stay there. In addition to local corporates, we see some secondary buyers. There are also Asia-based companies looking to get a foothold in Japan, and I’m sure that sort of transaction will continue.

Q: How often do you participate in secondary transactions, as buyer or seller?

A: As a buyer, we’ve had some, particularly in Fund III, which came after the Lehman shock and the Fukushima disaster. The market was depressed so we were happy to take out those positions. Some GPs had fund life issues around the same time. At the moment, valuations are somewhat normalized so you have to think more carefully about these opportunities. As a seller, we’ve had a handful of secondary exits. We sold sushi restaurant chain Sushiro to Permira, which was an example of an investor wanting to do something bigger with a business, more than what we could do. Those deals will probably continue to happen now that bigger funds have more capital available. But at the same time, our preference is for corporate buyers because the valuations are healthy and we think sending our investees back to natural business owners is better. 

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• Topics
• North Asia
• GPs
• Buyouts
• Trade sale
• Unison Capital
• Tatsuo Kawasaki